The latest Sears rescue plan from Eddie Lampert shows that the end is near – The Motley Fool

In the last six months, Sears Holdings (NASDAQ: SHLD) CEO Eddie Lampert – who is also the company's largest shareholder and largest creditor via its ESL Investments hedge fund – has made several proposals to inject cash into Sears by buying various assets.

ESL Investments presented on Monday its most audacious and bold restructuring proposal. Although the proposal suggests the possibility of significantly reducing Sears Holdings' debt, it is highly unlikely that third-party bondholders will be able to follow the plan. As a result, Sears may be forced to file for bankruptcy earlier than expected, possibly before the end of 2018.

What ESL Investments offers

ESL Investments believes that Sears Holdings can return to profitability, but only if it is possible to buy more time for a turnaround and reduce the company's debt (and interest charges). Monday's proposal calls for the surrender of all Sears Holdings' encumbered real estate and associated debt, as well as various other asset sales and the conversion to equity of much of Sears secondary and unsecured debt.

Specifically, Sears Holdings would try to sell as much of its property as possible over the next 12 months, using the proceeds to repay $ 1.5 billion in home loans. At this point, a consortium led by ESL would take over the rest of the encumbered real estate and the associated debt. Sears Holdings would be able to capture a share of the rise if real estate ended up selling for more than $ 1.5 billion.

The largest shareholder and creditor of Sears wants it to sell most of its real estate. Source of Image: Sears Holdings.

Meanwhile, ESL assumes that Sears Holdings would reap $ 1.75 billion by selling the entire home service unit, the Kenmore brand, and other unspecified "assets". ESL itself has already made tentative offers to pay $ 400 million to Kenmore and pay $ 500 million for two elements of all home services.

Lastly, the plan provides for the exchange of up to $ 1.1 billion of debt for new debt that would not be eligible for cash interest payments and would eventually be converted into Sears shares. Holdings. Unsecured bondholders would also have the option of depositing their bonds at a significant discount to face value: $ 0.25 per dollar.

There is no credible recovery plan

If everything went as planned, the ESL proposal would reduce Sears Holdings' debt from $ 5.59 billion to $ 1.24 billion. This would reduce annual interest expense from $ 439 million to $ 88 million.

Still, the proposal does not take into account the fact that Sears Holdings has been spending cash at an incredible rate in recent years. In fiscal 2017, the company spent $ 1.9 billion. Interest expense accounted for only $ 412 million of this outflow.

Although the deals offered by ESL are somewhat reducing Sears Holdings' cash consumption, they are not about to eliminate it. Meanwhile, the profitability of the core business has further deteriorated (that is, more negative territory). As a result, Sears would quickly begin to accumulate new debt as a result of a restructuring. This will make the prospect of converting debt into equity less attractive for current debt holders, with the exception of ESL Investments.

Lampert hopes that bondholders will take less face value for their debt in order to save Sears Holdings from bankruptcy. However, given that Lampert has shown no signs of reversing the situation, bondholders may prefer to bankrupt Sears as soon as possible, preferring the (more or less) known costs of the procedures. bankruptcy compared to the unknown – but probably quite high – – Cost to allow Lampert to continue to burn funds in Sears retail business.

Hurry up

ESL Investments has made it clear in its recent filing that time is running out. Sears not only has a debt maturity of $ 134 million next month, but also risks violating various covenants, which may require it to repay other loans in advance. Clearly, the company does not have the means to do it.

The tone of the ESL proposal suggests that if other creditors do not agree to the terms, ESL will no longer provide lifelines to Sears Holdings. This would quickly lead to bankruptcy of the company – probably before the end of 2018.

Lampert admits that if Sears Holdings goes into bankruptcy protection, chances are it will not happen on the other side. Yet, other creditors may be willing to concede that the company is doomed anyway. There is no reason for them to help Lampert "extend the runway" if there is no significant chance of recovery at any time. Thus, the end could be close for this iconic retailer.